Since the ETF industry was conceived close to two decades ago, innovation has been a hallmark of this rapidly-expanding corner of the investing landscape. Thanks to a unique structure that allows for liquidity, transparency, and tax efficiency, ETFs have quickly and consistently taken market share from other types of securities, bringing newfound flexibility to all types of portfolios.

If anything, the pace of innovation has accelerated dramatically in recent years; an aggressive product pipeline has produced hundreds of new products in the last several years, many of which are first-to-market ideas that tap in to new asset classes and investment strategies. Some of these innovations have benefited investors broadly, while others have been noteworthy primarily to more targeted groups. In case you haven’t been keeping up with all the latest developments in the ETF industry, here’s a quick recap of some of the noteworthy innovations that have enhanced the tools available to advisors and individuals alike:

Commission Free Tidal Wave

In addition to a general trend towards lower expense ratios, ETFs have become more cost efficient thanks to a wave of commission free trading platforms that have popped up in an attempt to lure savvy, sophisticated investors. A number of different brokerages now offer trading in various ETFs and ETNs commission free, allowing investors to sidestep fees that can make a meaningful contribution to the total cost of ETF investing.

In total, more than 200 different ETPs from a handful of issuers are eligible for commission free trading on at least one platform [see the complete list here, or in the ETF screener]. In addition to companies such as Schwab and Vanguard that offer their own ETFs without brokerage fees, TD Ameritrade lets investors trade more than 100 different exchange-traded products without commissions.

Commission free access shouldn’t be the only factor considered when evaluating potential ETF investments, but the widespread availability of funds without fees is without a doubt a very positive development for investors.

Investment Discipline ETFs

Russell is certainly a familiar name within the ETF industry; the index provider is responsible for the construction and maintenance of many of the benchmarks linked to popular ETFs. But in 2011 the company has made a push to become more of a direct participant in the ETF boom, launching its own lineup of exchange-traded funds. At the heart of Russell’s relatively suite of ETFs are “investment discipline” products that essentially deliver low cost, low maintenance access to strategies such as GARP, low P/E, contrarian investing, and aggressive growth [see ETFs To Smooth Volatility: Looking At Some Long/Short Options].

The thesis behind these products is both simple and compelling; they offer advisors and investors a way to implement somewhat advanced strategies that would otherwise be time consuming and expensive to achieve (and that would be subject to potential biases related to human error). The investment discipline ETFs from Russell are passive in nature, which means that investors get access to a rules-based approach while still doing more than simply owning the market.

The investment disciplines accessible through the new Russell ETFs are nothing new; advisors have been utilizing these techniques for decades. But the presentation within the exchange-traded wrapper is a recent innovation, and one that gives money management professionals and individuals alike a handy new tool.

Small Cap International ETFs

ETFs have long offered easy access to just about every major global economy, allowing investors to quickly and efficiently invest in both developed and emerging economies outside the United States. But the first generation of international equity ETFs consisted primarily of products that focused on the largest public companies in any one economy. While that approach resulted in very liquid products that covered a significant portion of the equity market in question, it has some potential drawbacks as well.

Specifically, mega cap companies tend to generate a substantial portion of revenues and earnings overseas, potentially diminishing the connection between an ETF and the local economy in which its components are traded. Moreover, these portfolios tend to be skewed towards energy and financials companies, resulting in little weight towards sectors such as health care and consumer discretionaries. In recent years, small cap focused ETFs have become popular alternatives or complements to large cap exposure, allowing investors to achieve a better “pure play” on key international markets.

Small cap international ETFs are nothing new; DFE and JSC, for example, have been trading since 2006. But the roster has expanded tremendously in recent years, and now more than a dozen different economies have dedicated small cap ETFs:

International Bonds: Now Featuring Precision

The aforementioned ETFs haven’t been the only important innovation in terms of international exposure; the international bond ETF space has exploded in recent months, resulting in numerous options for those looking to bring some geographic diversification to the fixed income side of their portfolios. U.S.-based investors still maintain a strong “home country bias” when it comes to bonds; most have little or no international fixed income exposure. That is changing slowly, however, thanks in part to increasingly easy access through a growling lineup of ETFs.

With interest rates in the U.S. at record lows, the case for international bond exposure is relatively easy to make in the current environment. In addition to a number of broad based emerging markets bond ETFs, there are now more targeted options available that allow for precise exposure:

This is one trend that is expected to continue; PIMCO has plans to launch a German bond ETF (NYSEARCA:BUND) and Canadian Bond fund (NYSEARCA:CAD) in coming months.

Emerging Markets Sector ETFs

ETFs have long been popular tools for investing in emerging markets–at least since the iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM) debuted in 2003. And the type of exposure available through exchange-traded products has steadily evolved; whereas once emerging market access was largely a binary decision, a slew of new products has allowed advisors and investors to fine tune this portion of their portfolios.

In 2011 EGShares rolled out a suite of sector-specific emerging markets ETFs, opening up a host of new strategies that have long been popular in the U.S. equity space (including sector rotation techniques). The introduction of these ETFs makes allows for a new degree of precision and granularity in emerging markets portfolios; advisors now have the ability to tweak positions based on current market conditions.

VIX Sliced And Diced

Though the VIX has been a widely followed benchmark for almost two decades, it has only recently become widely used as an investable asset. When iPath introduced a pair of ETNs linked to indexes comprised of VIX futures in early 2009, it opened up a new asset class that can be a tremendously powerful hedging instrument and a source of tremendous volatility (often to the downside). VIX-based strategies have become popular because of the strong negative correlation with stocks; theses assets can be useful hedges or tools for betting on chaos. But the lineup of VIX ETPs now goes far beyond the pioneer VXX, as developments in recent months have resulted in impressive growth in this corner of the industry:

VIX ETFs: While most VIX products are ETNs, ProShares offers a suite of four exchange-traded funds (VIXY, VIXM, SVXY, UVXY)

Inverse VIX ETPs: Several new products offer inverse exposure to indexes consisting of VIX futures, including the popular XIV.

Leveraged VIX ETPs: For those seeking to amplify exposure to volatility, products such as TVIX offer up leveraged exposure to an already volatile asset class.

Targeted VIX ETPs: UBS also has a lineup of several targeted VIX ETNs, focusing on maturities ranging from one to six months.

VIX ETPs are of course not for everybody; if you don’t have a firm grasp on the drivers of the “fear index” or the nuances of a futures-based investment strategy, it’s probably best to steer clear of this asset class altogether. But for savvy investors looking to use volatility in their portfolios, the wave of unique new exchange-traded products pave the way for impressive flexibility.

Disclosure: Long BRF.

Disclaimer: ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships.

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